Thursday, November 23, 2017

MANAGING TAX RISKS: VAT challenges to intra-Union trade


By Shabu Maurus

Value Added Tax (VAT) is not one of the Union matters listed under the First Schedule to the Constitution of the United Republic of Tanzania. Mainland Tanzania and Zanzibar, for VAT purposes, are two different jurisdictions.

VAT is one of the most important sources of revenue to both Mainland Tanzania and Zanzibar. VAT makes around 30 percent of the total annual tax revenues for each of the two sides of the Union.

For consumers residing in either or both parts of the Union, the fact that each part of the Union is a different VAT jurisdiction may not sound very relevant. After all VAT rates are the same – 18 percent. However, for businesses operating on both sides of the Union or across the two sides (“intra-Union trade”), VAT is likely to be one of the key considerations in their business decisions. If VAT is not handled well, it may mean 18 percent less profit in a particular taxable transaction.

The biggest pitfall, especially for Mainland-based businesses when extending to Zanzibar, has been the assumption that the two sides of the Union are one and the same even for non-Union matters like the VAT. Most of those would hence fail to adequately if at all, take into consideration the VAT intricacies and the potential tax challenges of operation on both sides of the Union. Both sides of the Union adopted VAT from July 1998. The VAT Act, 1997 was the law applicable in Mainland Tanzania only. Zanzibar, on the other hand, had (and still have) the VAT Act, 1998 that is applicable in Zanzibar only. These original VAT laws were, for all intents and purposes, very similar but both were not very facilitative to the intra-Union trade.

In 2014, Mainland Tanzania repealed its 1997 VAT law and replaced it with the VAT Act, 2014 with a destination principle as one of its key pillars. The destination principle is an internationally recognized rule that requires VAT to be collected by the jurisdiction where goods or services are finally consumed and not where the seller is located. The new VAT law was effective from July 2015. Zanzibar, however, still has its 1998 VAT law but it has undergone several changes over the years, including the amendments made this year. However, the Zanzibar VAT law has not fully adopted the destination principle. For example, services supplied to a customer outside of Zanzibar by a supplier located in Zanzibar will bear VAT in Zanzibar.

In Mainland Tanzania, the VAT law (VAT Act, 2014) is administered by the Tanzania Revenue Authority (TRA). The VAT law (the VAT Act, 1998) in Zanzibar is administered by the Zanzibar Revenue Board (ZRB). The two tax administrators are legally and practically independent of each other.

The two VAT laws and their administrations bring several challenges to businesses operating on both sides of the Union or those with ‘cross-border’ supply of goods or services. Some of the challenges stem from the existing differences between the two VAT laws. In my next few articles, I intend to cover the various differences in the two VAT laws and their implications for business.

The aim is two-fold. First is to highlight the key VAT aspects that taxpayers operating on both sides of the Union should be aware of in order to make their VAT compliance smoother or at least take the necessary precautions as part of their tax risk management. And second, is to point out some areas that I believe may require some reforms. Reforms that are geared to make the two VAT laws more facilitative to the intra-Union trade.

Mr Maurus is a Partner with Auditax International